Royal Dutch Shell Group yesterday launched a bid to buy naturalgas-rich independent Barrett Resources Corp. of Denver for $2.2billion in cash and assumed debt, which would give Shell animmediate presence in the Rocky Mountains. While Barrett’s board ofdirectors indicated it might fight the offer, Shell promised tobegin a hostile takeover if it is rejected.

Shell Exploration and Production Co. CEO Walter van de Vijversaid that he was “hopeful that the Barrett board will respondfavorably” to the offer to pay Barrett $55 a share, or $1.8billion. Shell also would assume Barrett’s $400 million debt. Theoffer is 24% more than the independent’s stock price on Feb. 28,which was $44.25. However, following Shell’s formal offer,Barrett’s stock skyrocketed yesterday nearly 34%, finally closingat $61.11. It closed a day earlier at $45.62.

If Barrett rejects Shell’s offer, van de Vijver said, “Shellintends to commence a fully funded, all cash tender offer for alloutstanding Barrett shares.” He said the company would wait for anaffirmative answer only through Friday.

The acquisition would give Shell an “immediate material presencein the Rocky Mountain region,” said van de Vijver. Barrett’s gasand oil properties are primarily in the Rocky Mountain regions ofColorado, Wyoming and Utah, the mid-continent region of Kansas,Oklahoma, New Mexico and Texas, and the Gulf of Mexico regionoffshore Texas and Louisiana.

Shell is more than 100 times larger than Barrett in marketvalue, but analysts said Shell would probably go higher if itsfirst offer is rejected. Barrett, which had no immediate commentfor the press, apparently was approached by Shell informally lastweek. Van de Vijver said he had spoken to Barrett CEO Peter Deathree times and said the discussions had been “friendly.” Barrettdid not confirm the discussions.

If Barrett rejects the formal offer, it could use Delaware laws,where it is incorporated, as a poison pill defense. Like other U.S.companies, the company’s statutes enable it to issue a huge amountof shares if a hostile bidder makes a tender offer. However, Shellsaid it would use Delaware laws to protect itself and mount its bidbecause under the state’s laws, a process called “action by writtenconsent” is allowed where a bidder gaining a majority of shares maytake management control of its target. The action would thus bypassthe poison pill.

In its year-end report last week, Barrett reported that its 2000net income had more than tripled to $68.1 million from $20 millionin 2000. Earnings per share were $2.04, and average daily gasoutput was 307 MMcf. Natural gas accounted for 96% of itsproduction last year on an energy equivalent basis with the rest incrude oil.

Dea said last week that Barrett’s 2000 growth was “strengthenedby commodity prices,” and credited the operations team with a”commendable year with double digit gas production growth bydrilling 1,227 wells while maintaining a favorable cost structure.”He said Barrett’s long-term growth was strengthened significantly,pointing to the new core development area in the Raton Basin.

Last year Barrett added to its net drilling inventory in thePiceance Basin with 20-acre spacing approval and a nicheacquisition; increased its net leasehold in the Powder River Basincoalbed methane play to 468,000 net acres; and generated severalhigh potential exploration projects. The Piceance, Powder River andWind River basin properties accounted for 32%, 21% and 18% of totalproduction, respectively last year. It also achieved a 21% increasein reserves with year-end proved reserves at 1,372 Bcfe, with 1,323Bcf and 8.1 MMbbl. It added 356 Bcfe of proved reserves in 2000,replacing 302% of 2000 production of 118 Bcfe.

“The Rocky Mountain region, the focus of the company’s gasexploration and development activity, represents 88% of thecompany’s proved reserves, an increase from 81% reported in 1999,”it said in its year-end statement. “Barrett’s portfolio of highquality development, exploitation and exploration projects willcontinue our long-term growth.”

In response, Moody’s Investors Service’s Robert N. McCreary andAndrew Oram placed Barrett’s debt, Ba 1 rated $150 million of 7.55%senior unsecured notes, under review for a possible upgrade becauseof Shell’s offer. Moody’s said its review is not triggered by thereview of Barrett’s 2000 results and outlook.

“It is a vote of confidence in North American natural gas pricefundamentals, Rocky Mountain natural gas price and prospectivityfundamentals generally, and prospectivity of Barrett’s reserve andprospect base in particular,” they said of the offer. “Barrett’sgrowth prospects increasingly center on very promising butcomparatively more price and unit cost sensitive major coalbedmethane properties in the Powder River Basin, in particular, and inthe Raton Basin.”

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